How to Budget with an Irregular Income
Are you a freelancer or an independent contractor or an entrepreneur? If so, then it does not need second-guessing to assume that you have a fluctuating or variable income. In some months, you earn a lot, whereas other months are dry. There is hardly a trickle of money. Due to the lack of a predictable income, you may think that budgeting is not for you. I’m not a fortune teller. But, if you think like that, then let me tell you one thing. It’s possible to budget on an irregular income. All you need to do is follow these simple tips for budgeting with an irregular income.
4 Budget Tips for Families with Irregular Income
1. Figure out your lowest monthly income.
When you have a job, you have a fixed monthly income. However, when you work as a freelancer or an entrepreneur, there is no fixed income. But, you have to know the figure based on which your budget will be formulated. How can you get that figure?
Do one thing. Look at the last year’s financial statements, and check how much you earned. What is the minimum amount you made in a month? Find out that. Once you have figured out your lowest monthly income in 2019, you can use it to create a budget for 2020.
2. List your discretionary and non-discretionary expenses.
Your budget will be based on your income and expenses. You have already figured out your lowest monthly income. Now, you have to calculate your discretionary and non-discretionary expenses.
Your non-discretionary expenses are the ones that are fixed and non-negotiable. You have to pay for them no matter how you have to arrange money. These expenses usually include housing maintenance, mortgage, insurance premiums, utilities, groceries (essentials only), transportation, child care, tax, and debt payments.
Your dictionary expenses are the ones that you can do without. These are frivolous or miscellaneous expenses. Check your credit card and debit card statements for the last year. Calculate how much you have spent on the discretionary expenses each month in the previous year, and then divide it by 12. You’ll get your average monthly discretionary expenditures. If your monthly non-discretionary expense is $2000 and discretionary expenditure is $1000, then you need to allocate this amount in your budget for these categories.
3. Create a budget based on the lowest amount you earn.
Once you have calculated your lowest monthly income, discretionary and non-discretionary expenses, it’s time to create your budget. The reason why you should create a budget on the lowest monthly income is because it’s a safe option. When you create your budget on a bare minimum, there are fewer chances for making a mistake. You can always add money to your budget later on. However, if you create a budget on the highest amount you earn in a month, then that would be a mistake. You may have to eliminate various expenses in the middle of the month.
When you have a variable income, you can’t expect to earn the same amount or a very high amount every month. When you create a budget, make sure you include the following categories in it.
- Non-discretionary expenses
- Discretionary expenses
- Hill and valley fund
If your lowest monthly income is $3000, your non-discretionary expenses are $2000, and discretionary expenses are $1000, then you’re in trouble. You don’t have any money for creating an emergency fund or a hill and valley fund. I will explain them in points no 4 and 5. The basic point is you don’t have any spare cash for emergencies. In such a situation, you have to look for ways to trim your expenses.
Look for options to reduce credit card debt or transport costs. You indeed have to make the minimum payments, but you can always avoid the extra cost. Watch out for ways to reduce your utility bills and transportation cost. That would help you to lower your expenses and perhaps give you spare cash for the hill and valley fund. Alternatively, look for additional ways to make money.
4. Test your new budget for a month.
After you have created your budget, it’s time to run it for a month. That would give you practical experience. If in the middle of the month, you realize that it’s not working, you can make some adjustments in your budget. Keep a track on your income as well. If you earn a substantial amount, then don’t spend it. Keep it in the hill and valley fund. Now, what is a hill and valley fund? It is a fund that helps you survive those months of the year when you have 0 or low income. In business, you have both hills (seasonal or boom period) and valleys (lull period). The hill and valley fund helps you to cover your expenses even when there is no income without touching your emergency fund.
So, whenever you earn extra money or get surplus funds, make sure you put it in your hill and valley fund. This is an integral part of your budget.
Finally, we have come to the end of the article. So, let me share the last tip with you all. The final tip is that you should always give yourself 3 months. This is the minimum time you need to give yourself to get in the perfect budget rhythm. Initially, you will make a few mistakes. Don’t feel too bad or disappointed. Rather, learn from your mistakes and try to create a predictable and practical budget on an irregular income.
Guest Post by Stacy B. Miller
This guest post was written by writer, blogger, and content marketing enthusiast Stacy B. Miller. Her blog vents out her opinions on debt, money and financial issues. Her articles have been published in various top-notch websites and she plans to write many more for her readers. You can connect with her on Facebook and Twitter.
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